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Pending home sales to lag until inventory crisis ends

Path to homeownership an 'uphill climb'

Pending home sales started the year out on a low note as rising home prices and dwindling inventory continues to impede any potential housing growth.

According to the National Association of Realtor’s first pending home sales report for 2016, the Pending Home Sales Index, a forward-looking indicator based on contract signings, declined 2.5% to 106.0 in January from an upwardly revised 108.7 in December. However, this is still 1.4% above January 2015 (104.5).

Despite increasing year-over-year for 17 consecutive months, last month’s annual gain was the second smallest (September 2014 at 1.2%) during the timeframe.

“While January’s blizzard possibly caused some of the pullback in the Northeast, the recent acceleration in home prices and minimal inventory throughout the country appears to be the primary obstacle holding back would-be buyers. Additionally, some buyers could be waiting for a hike in listings come springtime,” said Lawrence Yun, NAR chief economist.

“First-time buyers in high demand areas continue to encounter instances where their offer is trumped by cash buyers and investors,” adds Yun. “Without a much-needed boost in new and existing-homes for sale in their price range, their path to homeownership will remain an uphill climb.”

The Northeast caused most of December’s growth in the PHSI thanks to warmer than average weather and more favorable inventory conditions compared to other parts of the country.

According to the NAR report, existing-home sales increased last month and were considerably higher than the start of 20152, but price growth quickened to 8.2%– the largest annual gain since April 2015 (8.5%).

And looking at NAR’s predictions, existing-homes sales this year are forecasts to be around 5.38 million, an increase of 2.5% from 2015. Also, the national median existing-home price for all of this year is expected to increase between 4% and 5%. In 2015, existing-home sales increased 6.3% and prices rose 6.8%.

While the hope is that appreciating home values will start to entice more homeowners to sell, Yun says supply and affordability conditions won’t meaningfully improve until homebuilders start ramping up production – especially of homes at lower price points.

It’s important to note that the inventory crisis is slowly starting to turnaround. The latest new home sales report presented a more positive forecast on the future of the inventory crisis.

Right now, the share of new home sales not started, in other words homes purchased off a plan, hovers near a 10-year high.

Broken up regionally, the PHSI in the Northeast fell 3.2% to 94.5 in January, but is still 10.9% above a year ago. In the Midwest, the index fell 4.9% to 101.1 in January, but is still 1.4% above January 2015.

Pending home sales in the South slightly increased 0.3% to an index of 121.1 in January but remain 1.3% lower than last January. The index in the West decreased 4.5% in January to 96.5, but is still 0.4% above a year ago.

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